Living off Equity - is this still an option?

[julieo]

I am really interesed in LOE. It seems to make more sense to me than balancing the debt on retirement so I am looking closely at this option. However we are currently talking to rellies about it re them possibly doing it. Both are retired and soon to qualify for a pension.

Question here.

If the asset value is say $750,000 and part of that is a rental property (value $320,000) with a rental income of around $13,000pa gross, can living on off an asset be used by getting a LOC of say $280,000 and living on about $30,000 PA from the LOC??

My questions are:

As the income is borrowed funds and total asset is below the pension threshold, would they be able to still quality for a pension and other benefits??

Thanks
Julieo

 

[DD1]

We live mainly on equity

Our buyers agent work generates a good income each year so that covers our rates and body corp fees and maintainance on our portfolio(now back to 20 props), and this is supplemented by anything we need for the home is all peeled out of our equity. We play with the increased equity here or there and with a good spectrum of properties to play with this is relatively easy.

With one or two properties, forget it as a bad risk.

Its a numbers game and cashflow is king.

DD1

 

[DavidMc]

-Merovingian. Financial Plan : Financial Freedom! — $75K p.a. passive income within 10 years ... 0% complete (based on net worth of $1.5m).

I’m missing something here. If you put $1.5m into cash (eg, ING at 5.4%) that’s an income of 81k per year.

OK, so maybe it was $75k of passive income, indexed to inflation + owning your PPOR outright. OK, go for something that pays around 8% on average (surely this is easily achievable?). This would increase in value of $120k per year, some of which can be re-invested and some taken out as income.

Objective complete! (?)

 

[Merovingian]

I’m missing something here. If you put $1.5m into cash (eg, ING at 5.4%) that’s an income of 81k per year.

OK, so maybe it was $75k of passive income, indexed to inflation + owning your PPOR outright. OK, go for something that pays around 8% on average (surely this is easily achievable?). This would increase in value of $120k per year, some of which can be re-invested and some taken out as income.

Objective complete! (?)

Hi domcc1,

You raise an interesting point.

My signature was just based on using a conservative yield of 5% per annum. Indeed it is possible to achieve much higher yields, especially in property, if one diversifies into non-residential property, (as an example), etc...

The problem with putting that sort of money in cash, to live off of, is that with the money in a property portfolio, the money is working many times over, utilising the following:

1. Rental income;
2. Capital gain;
3. Leverage;

With cash, you lose 1 and 3, and so your money is not working as hard as it could.

Anyway, that's my reasoning.

 

[DavidMc]

The problem with putting that sort of money in cash, to live off of, is that with the money in a property portfolio, the money is working many times over, utilising the following:

1. Rental income;
2. Capital gain;
3. Leverage;

With cash, you lose 1 and 3, and so your money is not working as hard as it could.

Anyway, that's my reasoning.

Sure, agree 100%. It was just a 'high level' observation. It sounds like your original goal of $75k might need to be bumped up .

 

[Merovingian]

Sure, agree 100%. It was just a 'high level' observation. It sounds like your original goal of $75k might need to be bumped up .

Well for the moment the $75,000 goal is what I'm aiming for, so either way it won't matter short term...

 

[markpatric]

Hi Simon

Increasingly, Im working with people that are LOEG. Most, believe it or not are using the strategy by accident rather than design.

Looking at their numbers, its hard to see how in general if one sucks up only 25 % to 40 % or so of the growth as "income" that this cant work once one reaches critical mass.

Im always amused at how some people that havent been "there" are detractors of something (im sure im guilty of it myself too, cos you know Im often wrong but never in doubt)

Every day I hear, this or that doesnt work, or I have tried that, or I know someone that tried that.............. The old adage of "Dont ask a 50 K PAYG earner how to make 300 k in business applies just as much here I believe".

Ta

rolf

The last bit you said there is right, but most on the forum are what you would call 50ks in the scheme of things, if they were rich or even close to financial freedom I doubt they would ask the question or need answers.

As far as living off equity yes I also do this right now as well, and I`ve seen many do it, but it is a snowball backwards/reverse compounding imo for anyone who does it, I suppose if you have a million or two it doesn`t matter a whole lot.

 

[plumtree]

The 'Living Off Equity' formula accepts as a 'given' that property values will continue to increase in value indefinitely. This has happened over the years especially since after the war ie 1946. However, many can see reasons why this precept is not guaranteed anymore! I, personally, have decided that the following 2 reasons will deter market growth for the next 10 years or more; the recent boom has effectivelly overpriced the property market and it will self adjust and the impact of the Baby-Boomers withdawing from the market will reduce demand considerably. If you try LOE while property values are not increasing or in fact are declining, you are obviously not going to restore your LVR. To put it simply, cash flow demands will have to be reduced or you better start selling.

 

[simonjulie]

Hi All
I liken "living off equity" to a Train heading to toward a section of track that is still under construction.
train=lifestyle
fuel = cashflow
speed= debt
track= investment portfolio structure growth/investment portfolio capital value growth
The trick is to only move as fast as the new construction will allow or there will surely be a train wreck.
In life there is always stuff getting in the way of the perfect plan.
With investing it is down to becoming flexible,open minded and determined to keep the train on track
Kind regards
Simon

 

[DavidMc]

Hi All
I liken "living off equity" to a Train heading to toward a section of track that is still under construction.
train=lifestyle
fuel = cashflow
speed= debt
track= investment portfolio structure growth/investment portfolio capital value growth
The trick is to only move as fast as the new construction will allow or there will surely be a train wreck.
In life there is always stuff getting in the way of the perfect plan.
With investing it is down to becoming flexible,open minded and determined to keep the train on track
Kind regards
Simon

Great analogy! I always wanted to be the driver of the train in kindergarden!

 

[ibeginner]

Hi, Plumtree,

I am totally with your every word. Most of people doing so are because of a gain in the last few years in eastern states and these years in WA (include myself). I have not been working for 2 years and built up a 1.6million portofilo.

But I think it will not be sustainable even in WA. Developers, investors almost everyone are greedy --- Just like few years ago in Sydney. When all people get greedy and things will go wrong. Economic fundamentals have not changed regarding investment return.

As a small developer (buying a block (or blocks) to build few houses, want to make 50%-100% return in a year or so --- will not come so often I believe.

Personally I want to reduce my portfolio.

 

[Cheeks]

Personally I want to reduce my portfolio.

I'm not thinking that at all at the moment.

I am increasing my portfolio whilst maintaining a sensible LVR and SANF.

It is my belief that I should always be looking at expanding but with value and quality.

Why would you want to reduce your portfolio?

 

[simonjulie]

Hi Cheeks
I am a bit slow. What is SANF?

 

[Cheeks]

Sorry - Sleep At Night Factor

 

[simonjulie]

Hi Cheeks
I like that.
I am glad you mentioned the LVR balance.
As our portfolio has grown I have adopted the strategy of converting the $'s to percentages. This helps me not get so scared about the large amounts of money flowing through the bank accounts. Maintaining and tweeking the %'s is a lot less stressfull. This also helps the SANF.
Kind regards
Simon

 

[bianca]

This "living of equity" sounds great. But HOW do you actually do it? Do you just refinance, set up an LOC with the surplus equity, and then invest and live from that? I recently posted the "just found out i am a millionaire " post and this sounds like "the plan". All of the above ideas are do-ables, or "already dones" for us."Living of equity for dummies" would be a book I am interested in! Give me the exact formula pleassse.....

cheers

 

[Mr. Fabulous]

In the most basic terms bianca, at least the way Navra do it is to draw down the equity from your properties, invest it in an income producing asset (like shares or a managed fund - I know I particularly good one, wink wink) and use the returns from that to live on.

As long as you are making enough from the returns, then everything is fine. Like Simon said earlier, LOE is a style that needs to be monitored, you can't just set and forget. Just something to ponder.

Mark

 

[simonjulie]

Hi Bianca
IMHO This is how you do it.
Work out how much it costs to run your lifestyle for one year.
Imagine an investment portfolio with an equity level that would support an increase of 10%LVR which equates to at least say 4 times your annual lifestyle.
Increase your LVR by 10% of the portfolio and use that money for further portfolio growth/maintantence. Then take a portion of the rent/dividends etc. to replace your lifestyle costs.
Sounds simple enough but it is important to keep the balance so the machine keeps moving in the right direction.
example:
4mil portfolio
LVR 55% = 2.2mil loan 1.8mil equity
lifestyle $50kpa
increase LVR to 65% = 2.6mil loan 1.4mil equaty + $400K liquid funds
Note: the porfolio balance of payments still has to be maintained either through return or capital growth.
devote the $400K to grow/maintain the portfolio.
live off $50k from the rent/divs.
balance is everything.
Kind regards
Simon

 

[see_change]

This "living of equity" sounds great. But HOW do you actually do it? Do you just refinance, set up an LOC with the surplus equity, and then invest and live from that? I recently posted the "just found out i am a millionaire " post and this sounds like "the plan". All of the above ideas are do-ables, or "already dones" for us."Living of equity for dummies" would be a book I am interested in! Give me the exact formula pleassse.....

cheers

Biance

There have been several " Mega Threads " about LOE and a variation on the theme with Cash bonds in the past . I think you will find that several of the people who posted on the negative side of this debate have no interest whatsoever of repeating their previous comments . So if you want to find a variety of opinions , so a series of searches of Living on equity , cash bonds and Steve Navra and you will come up with some light reading.

Here's a couple to start you off

http://www.somersoft.com/forums/showthread.php?t=14486

http://www.somersoft.com/forums/showthread.php?t=19649

See Change

 

[Rixter]

This "living of equity" sounds great. But HOW do you actually do it? Do you just refinance, set up an LOC with the surplus equity, and then invest and live from that? I recently posted the "just found out i am a millionaire " post and this sounds like "the plan". All of the above ideas are do-ables, or "already dones" for us."Living of equity for dummies" would be a book I am interested in! Give me the exact formula pleassse.....

cheers

Bianca,

Here's a link to my basic model for Living Off Equity - keeping in mind the example takes into account that all your portfolio cashflows will be ."serviced via Rental income, the Tax man, an LOC and/or Cashond structure.

http://www.somersoft.com/forums/showthread.php?p=138155#post138155

I believe that it is a plausible option if not abused & kept in check. It's a way that ensures when you do start drawing against your portfolio equity that you don't start to exceed the capital growth including the acumulating interest on the drawings. The (CGA) formula provides an inbuilt a boundry both in the CG acquisition phase & redrawing phase (ie.80% in 12 months), then moves onto the next one.