Living off Equity - is this still an option?

[simonjulie]

Hi Bianca
I have just been reading another a post you started.
It spelled out your position.
The above example is pretty close to your current situation (I think)
My wife Julie and I have so far succesfully been living off equity full time for just over four years and can understand the questions you have been asking.
Like you we built a large IP portfolio in a regional area(ACT).
When we reached around 6 IP's we started to look seriously at what we were doing.
We had heard of Steve Navra. We met with him and found his cash bond strategy at that time (around 4 years ago)suited our own plans so we learned a lot from him in regard to finance and property analysis. He was the one that showed us that we could stop working in our jobs. He has written epic posts on this forum in that regard.
Having said that, we moved on from his structure back to our own which was to buy good realestate below market value, add value through simple cosmetic renovation,hold and lease out,refinance for future growth and maintanence.
IMHO, you and your husband have already done all the hard work. It is now time to get your heads around the concept of making your assets work for you.
Build a team of masterminds,get your heads around financing portfolio structures. My broker is Mr Ed from this forum.He understands and specialises in this type of thing.
Kind regards
Simon

 

[DD1]

a flaw is found

When you forcast your costs for the year, you usually dont count things like holidays and new toys(boats/planes) in your plans. If you were tight on funds, found you wanted something, then its hard to see the budget not being blown away in a flash.

Another thing is that when you have more time you want to do more things and this in itself can be the downfall of the plan.

We still need cashflow, hence the non reliance in total equity for our income stream.

The less you hit equity the quicker the equity grows. So it can be a two edged sword.

DD1

 

[Rixter]

When you forcast your costs for the year, you usually dont count things like holidays and new toys(boats/planes) in your plans. If you were tight on funds, found you wanted something, then its hard to see the budget not being blown away in a flash.

Another thing is that when you have more time you want to do more things and this in itself can be the downfall of the plan.

We still need cashflow, hence the non reliance in total equity for our income stream.

The less you hit equity the quicker the equity grows. So it can be a two edged sword.

DD1

What if you had a sufficent aset base that provided a very handsome lifestyle and equity erosion was not an issue ?

 

[simonjulie]

Hi DDI
Flaw?
One needs to know on what financial ground one is standing on.
I don't budget. Rixture hit the nail on the head with his answer.
IMHO,Tracking ones past financial history is a much more realistic and less restricting stategy than budgeting for the future.
Creating Safety nets and alternate financial strategies are paramount to this strategy.
Simon

 

[grossreal]

living on equity

hi all
I have read these posts and they are very interesting.
I cpi or 6% which ever is the lower my rentals and Ive structured to draw the cash out of the equity build up that this creats.
I link the rental to the loan repayments then its neutral and draw out what I call fat.
The fat is not taxable as its lending and you live off the fat.
when you have multipul investments all increasing in the same way you draw small amounts out from each.
The investments are always neutral and are increasing at or above cpi hence you have on going cash flow as you draw.
I develop and hold what is above my build and land cost and then lend on what a tenants rent against loan repayment and make it neutral tennant starts at normal rent with 6% or cpi increases.
This is then added to my bank of investments.

 

[Tramsnod]

Hi Guy's

I'm a complete novice at this but I've kind of got my head around the concept EXCEPT....

If you buy a property for $200k and in 10 years its worth $400k ....

A) How do you draw down the excess, do you use a line of credit? or refinance a loan?
B) If you do how do you service the repayments. Is it the using the rent (which we hope has doubled as well)?

 

[Merovingian]

If you buy a property for $200k and in 10 years its worth $400k ....

A) How do you draw down the excess, do you use a line of credit? or refinance a loan?
B) If you do how do you service the repayments. Is it the using the rent (which we hope has doubled as well)?

If you bought a $100K property back in 1995, (10 years ago), assume it is now worth $200K.

If you bought the property back in '95, using a 20% deposit, that leaves an $80K loan. Assuming the loan was interest only, and you did not pay any of it off in that time, then the loan will be worth $80K today. Thus, you now have $120K in equity, ($200K - $80K loan).

Hence you now have an LVR of 40%. You could simply go back to the bank and ask for a loan refinance based on this new $200K valuation. If you decide to go back to an 80% LVR, then you would now have a loan for $160K, meaning you have gained $80K net.

And yes, this loan must be serviced somehow, and the income received from your properties may be used for this purpose.

I hope I have explained it well...

 

[Rixter]

If you bought a $100K property back in 1995, (10 years ago), assume it is now worth $200K.

If you bought the property back in '95, using a 20% deposit, that leaves an $80K loan. Assuming the loan was interest only, and you did not pay any of it off in that time, then the loan will be worth $80K today. Thus, you now have $120K in equity, ($200K - $80K loan).

Hence you now have an LVR of 40%. You could simply go back to the bank and ask for a loan refinance based on this new $200K valuation. If you decide to go back to an 80% LVR, then you would now have a loan for $160K, meaning you have gained $80K net.

And yes, this loan must be serviced somehow, and the income received from your properties may be used for this purpose.

I hope I have explained it well...

Just to follow on further from above, you could set this up via a LOC with a credit limit of $160k (80% LVR) as Merovingian as pointed out.

For example -Over the next year you have the option of drawing out up to $80k Tax free All you simply do is access the funds via ATM or over the counter when ever you wish. Lets say you go the ATM, stick your card in and draw out $1000.00 per week TAX FREE to enjoy however you wish. At the end of the year you've only increased your LOC by $52k bring the balance up to $132k with $28k still undrawn up your sleeve. Now lets say you have another 7-10 Ips you can do that with year by year - sounds alright to me

 

[Tramsnod]

It's like a cloud has lifted.

Thanks for that, you have explained it well.

 

[markpatric]

The bottom line is though that you need a lot of equity to begin even thinking about this strategy, and I would think most people would invest the money in some form of business where you would employ others and work as you like when you like.
So "living off equity" becomes a non event, which is always acheivable anyhow by simply living off the rent of fully owned properties, only you are paying a little tax and keeping things in check, rather than paying interest on further borrowings, fees and digging a deeper and deeper hole.

 

[Rixter]

The bottom line is though that you need a lot of equity to begin even thinking about this strategy, and I would think most people would invest the money in some form of business where you would employ others and work as you like when you like.
So "living off equity" becomes a non event, which is always acheivable anyhow by simply living off the rent of fully owned properties, only you are paying a little tax and keeping things in check, rather than paying interest on further borrowings, fees and digging a deeper and deeper hole.

What if the interest on further borrowings is not an issue, as its being well covered for by OPM (ie tenants & tax man?)

 

[markpatric]

I expected that, it all depends I suppose on the details of how you draw the money and from where (PPOR or IP).
My main point is that you are banking on a certain appreciation over time and time is just not cooperative or predictable.
A balance of drawing on equity and rental returns is probably the best bet but it is a complicated task imo and again, such a large amount of equity is needed by the time you have it it is likely you have been using the strategy to some extent and are smart enough to know it is certainly not compounding growth anywhere near what you would need to do to get to that point.
As a sole means of income it really seems like the kind of strategy a lazy rich kid or a lotto winner would use.
Unusual that every single person advocating the use of it are "working" very hard at selling something!.

 

[grossreal]

equity

hi markpatric
couple of things i'm not selling anything and my structure is set up for this system and unlike know nobody told me how to set it up it just evolved.
by pegging rentals above cpi the the redraw should be available and by mixing resi with comm you can draw as you wish.
I currently don't as I have developments but could live off this system now except I have a time line that I'm keeping to and using this equity for my developments.
compounding growth you use prior to starting to draw down so you land bank your investments and leverage off them to the next investment.
If you are developing you draw a loan or line of credit against the value that the rent will cover and use this cash for the next investment and if you get a group of like minded people and you pool your available cash then you have a developing group.
(The bottom line is though that you need a lot of equity to begin even thinking about this strategy) not sure about this you can start this strategy with the first investment you just must set it up correct from the start. I have posted gross and his system.
To start in that system can be minimul and any body can do it.

 

[Ol School Skata]

Tax man help?

Rixter,

I am not sure how they tax man helps you with your property servicing costs.

If you are living off equity as you have portrayed in your example by drawing out $1000 a week, you are not paying any tax so how does the tax man help you.

Surely you would only get 'tax man help' if you paid tax over the year.

In the LOE example, i doubt the rents would be enough to cover all expenses (rates, interest, management fees, repairs etc) so where would you be paying tax to get some tax back?

OSS

 

[Ol School Skata]

After rereading my messege it may come across as "I want you to provide me with this info" . My apologies there, I was really just speaking generally and not directed at you.

But i am interested to know how the tax office may help with my LOE operating costs if i am making a 'loss' from the LOE plan. I must be missing something here.

Look forward to your reply

OSS

 

[Rixter]

Rixter,

I am not sure how they tax man helps you with your property servicing costs.

If you are living off equity as you have portrayed in your example by drawing out $1000 a week, you are not paying any tax so how does the tax man help you.

Surely you would only get 'tax man help' if you paid tax over the year.

In the LOE example, i doubt the rents would be enough to cover all expenses (rates, interest, management fees, repairs etc) so where would you be paying tax to get some tax back?


OSS

Hi ya OSS,

RE: "But i am interested to know how the tax office may help with my LOE operating costs if i am making a 'loss' from the LOE plan. I must be missing something here."

Good points you make. The tax free income (from LOC) is generated from the Capital Growth side of the Portfolio . Your answer actually lies back on the Cashflow side of the Portfolio.

You still have to declare all your rental income and as such pay the appropriate level of tax accordingly. As such you're claiming all your portfolio cash deductions & non-cash deductions against that income along the way.

Basically your increase in interest due to the annual Tax free redraws is offsett by the rent increases along the way over the next 10 year on that particular IP. BUT as time goes by due to cpi, your rental incomes will further increase to a level where by your cash deductions & non-cash deductions no longer offsett (for sake of a word) or reduce your taxable income to 0% or below into tax credits, thus you're pushed back up into a income level subject to paying tax. So to minimise that back to zero or below again you simply purchase another IP.

Damn shame that, having to purchase another IP to increase your aset base, wealth accumulation and net worth just in order to minimise paying tax.

 

[grossreal]

hi all

yes and you can accrue losses or negative base.
you can project those forward for upto 5 years and any tax that has been paid if you have structure as a company or multipul companies you can claw back tax losses along the way.
This is for your tax agent to structure at the start.

 

[Rixter]

yes and you can accrue losses or negative base.
you can project those forward for upto 5 years and any tax that has been paid if you have structure as a company or multipul companies you can claw back tax losses along the way.
This is for your tax agent to structure at the start.

Yep , can do that with IP held in own name too (tax credits) - ahhhhh dont you love it

 

[grossreal]

yes

yes I do love it
but its all to do with the structure that you have put in place and the way it has been set up to restructure to get to these examples is reasonably difficult and can be expensive.
I know afew people who like property in thereown name I have the multipul company option its horses for coarses but as long as the end result is the same Its a flexability issue.
I would be interested in Rixter view of my gross real and his system and what your views are. pm me

 

[Rixter]

Yep , I couldnt agree more - Its all about structure. Drop into the IP chat room.