Living off Equity - is this still an option?

[see_change]

Hi,

I first proposed the concept of living off equity well over 3 years ago!


......
For those of you who listen to the doom 'n gloom crowd . . . please thank them for costing you about half a million dollars of value plus the last three years of very good living.


.....
From those of us who had the forsight to actually invest, well 80% of the gain margined at 50% is now producing about an extra $100,000 of distributions per year. (At 10% pa)

PS: this quarters distribution is about 5.5%


Regards,
Steve

What will it cost you NOT to invest over the next 3 years??

Steve

I'm not aware that the so called " Doom & Gloomers " you refer to have been suggesting that people don't invest

See Change

 

[Rixter]

Steve

I'm not aware that the so called " Doom & Gloomers " you refer to have been suggesting that people don't invest

See Change

One can only speak for oneself Sc

 

[keithj]

I first proposed the concept of living off equity well over 3 years ago!

Since then there have been many doom and gloom proponents warning of the potential downsides . . . and advocating a do nothing / beware of changing market scenario.

I'd disagree - the 'D&Gers' haven't advocated doing nothing - they have advocated many different approachs to investing. LOE had it's place in the strongly rising market. The issues I had with it were that it was being sold as the last retirement strategy anyone with sufficient equity would ever need with no downside. And that the last few years (exceptionally good) figures were indicative of all future years.

I strongly advocated property purchases in Brisbane since the start of 2002. (Based on Rental Reality)

I clearly recall you mentioned at a seminar in early 2002 that you were selling 9 of your properties in Brisbane because there were going nowhere. The reason I remember is because I had been buying in Bris.

So back to the subject of this thread - Living Off Equity - Is it Still an Option?.

Or is it time to put the LOE strategy back into the toolbox along with Cashbonds & Off-the-Plan & Docklands Apartments & Deposit Bonds & Derivex ?

I remember the old days of this forum when people would regularly ask about NII & Henry Kaye, with threads about how to acquire as many deposit bonds as possible in as short a time as possible - there aren't many these days. In 10 yrs time it may be LOEs & CBs turn again & the banks may even have forgotten about deposit bonds. Until then find some new strategies for TODAY's environment.

 

[D.T.]

Hi,

How come everyone makes a big issue out of it? I havent been investing for as long as some here and even for me its a pretty simple concept. It puts a "" on my face every time I read some of the posts that try to dissuade people from doing this.

 

[Rixter]

Ajax,

What has delayed you in starting for the past 3 years? Life get in the way?

 

[grossreal]

equity

hi all
haven't posted on this post for a while but I have read the postings
a couple of things that i would like to answer with regard to my structure.
1 if there is a down turn in the market yes pricing goes down but rents don't and if they are a long term lease and mix resu with comm and you have factored in a drop system then you don't have a problem
2. steve is using cash bonds, mine is using cash flow positive property off set by neg high growth property one evens out the other and if and when required you have equity available.
3. Yes bill banks do change there rules but not on equity as they would have to change every household and thats not going to happen.
4. The debate was can you live off equity and the answer from me is yes you can you can call it living and reinvesting or living and cash flowing but at the end of the day you are living off equity.
5. I am not comfortable to live off the short term money market but it is possible to do so just ask the guys driving ferraris in double bay but you can pull out all the figures and I can post a couple of excel spread sheets on how it is possible but at the end of the day these are systems and a system must be worked out and ran as that system.
sorry for this but my system has been in operation hell of alot longer then steve's navara 3 years and has been drawn up by accountants that have set it up specific for our needs.
6. If the bottom dropped out of both the share market and the property market and the bombs came raining down I still think this system will go on just the same as it has been planned to do.
So yes it has been interesting looking at different systems but they are not all the same and as for personal attacks, attack the system because it is only when the system is under attack does it gets stronger.
I run a 1 to 1 investment formular 1 neg per 1 posi and help in a couple of company trusts in different states.
I have spell checked so sorry for any errors

 

[Bill.L]

Hi all,

Ahh hindsight, isn't it wonderful.

Steve's example,
"So for someone with $500,000 of equity available then to employ on a LOE structure . . . who had property worth for example 2,000,000 with $1,300,000 debt.

They might have purchased a $500,000 property in Brisbane. (($125,000 deposit and costs at 80%) and invested the balance of $375,000 into the fund with a 50% margin."

Now unless my maths is wrong, if you add the new $500,000 debt to the existing $1,300,000 debt, you get $1,800,000 debt against property of $2,000,000.
That would be 90% LVR. Did they get this loan on No-doc??? Please tell me where.


Then this bit....
"LOE would have provided an income of $75,000 per year."

Followed closely by.....
"The share fund would assuming reinvestment be worth $856,676. (Gain of $106,676 after the margin loan.)"

It is so nice to have your cake and eat it too.

But when I put your figures into a calculator, I get a different answer.
$375,000 at 7% (no-doc loan) = $26,250
$375,000 at 8.5% (margin loan) = $31,875

Total interest = $58,125
Fund return (Year 1) at 19.66% = $147,450
Net return after interest = $89,325
Minus $75,000 to LOE = $14,325

Now for year 2 add the $14,325 to the $750,000 = $765,325
Total interest for year 2 = $58,125
Fund return ( Year 2) at 19.66% = $150,266
Net return after interest = $92,141
Minus $75,000 to LOE = $17,141

Total gain in fund after LOE = $31,466 or 4.2% over 2 years.
Now if the fund keeps performing at 19.66% pa, the couple will be very happy.

Also what about if the couple had their property in Sydney and the purchased property in Melbourne, say at the new developments in either Heatherton or Mulgrave, but only purchased the new one at around the start of the fund in 2003. Would this change the rosy picture for the property growth at all???

Again, isn't it easy, no need to consider the downside, don't listen to anyone who would advocate a more conservative approach as they are just doomsayers, comes to the fore.

My beef has always been that the proponents of this strategy NEVER show that there is fire in the markets, and what could potentially happen if it didn't go according to plan( and I don't mean end of the world meltdown, just the type of correction that tends to happen every 10-15 years).

bye

P.S. (and it would be good if they got the numbers correct anyway)

 

[Steve Navra]

Hi all,

Ahh hindsight, isn't it wonderful.

Actually NOT hindsight at all . . . this is an actual event.
Yes, THIS IS WHAT ACTUALLY OCCURED.

But then . . . Bill.L is the reason I will no longer post here.

Sorry for trying again to contribute to Somersoft.

C U on InvestEd,
Steve

 

[Ajax]

Steve,

that's the easy way out ("I'm not playing anymore"). I have the same questions as Bill but I was too lazy to do the calculations.

If $500k equity is being utilised from $2m of property with $1.3m existing debt, I assume that the loan was a 90% LVR Lo-doc loan? If so, what was the LMI payable on this 90% LVR lo-doc loan? What interest rate is payable on the 90% LVR lo-doc loan?

If cash bonds are used in this funding exercise, what interest is received each year on the cash bonds? What interest is being paid each year on the monies used to purchase the cash bonds? What commission is paid at the time the cash bonds are purchased?

I don't wish to criticise your ideas as I have benefited from attending your presentation 3 years ago and your approach to property. However LOE is an issue that is of keen interest to most people here, many of whom who have a years of financial/investing experience (not me). The numbers/examples you put up will always be analysed and not blindly accepted (just as any business would analyse a business proposition).


Ajax

 

[willair]

But then . . . Bill.L is the reason I will no longer post here.

Hi Steve,
imho,
Bill.L is not the only reason, this forum needs both opinions
from people like yourself and the importance of accepting
change everyday.
good luck
willair..

 

[MichaelW]

My beef has always been that the proponents of this strategy NEVER show that there is fire in the markets, and what could potentially happen if it didn't go according to plan( and I don't mean end of the world meltdown, just the type of correction that tends to happen every 10-15 years).

Bill,

I think Steve's point was that this is only an approach for those that have reached critical mass. In his example he quoted a $500K buffer that is now built up in the structure.

The point is that there is now a BUFFER of over $500,000 for possible future corrections in the market.

Even if you then have a bad year you can still draw equity and just chew up some of the buffer. When the good years come around then that buffer is rebuilt and gets bigger. So long as you're drawing less than the long term average growth of your structure then you can buffer the peaks and troughs.

This is definately not a strategy for someone with very little net worth. Don't try this at home kids!

Cheers,
Michael.

PS I'm not living off equity but believe the tax breaks it affords make it something worth considering when your net worth gets in to the several $M mark.

 

[see_change]

Steve I can understand your anger at the post Bill made which triggered you decision to leave and I said so at the time.

To be honest I was suprised Bill wasn't banned from the forum at that stage, however you have said yourself that his questioning of your methods in the past have made you review your approach and have helped you to a degree. ( can't recall you exact words ).

At this stage I'd have to agree with the sentiments that Ajax expressed. You have contributed significantly to Somersoft in the past , and I'd be very suprised if somersoft hasn't contributed to your success over the last 4-5 years.

I know somersoft has helped me significantly and that is one of the reasons why I keep contributing.

See Change

 

[WillG]

I would like to see a moderated thread where Bill and Steve put there points across and where there is a mechanism to vote on the winner. I have learned a lot from Steves ideas and Bill's analytical approach and find merrit in both arguments.

I am not interested in personal attacks or people walking out. This is an internet forum, not a physical boxing match.

Cheers

 

[Steve Navra]

At this stage I'd have to agree with the sentiments that Ajax expressed. You have contributed significantly to Somersoft in the past , and I'd be very suprised if somersoft hasn't contributed to your success over the last 4-5 years.

I know somersoft has helped me significantly and that is one of the reasons why I keep contributing.

Hi Seech, Ajax . . .

I have always invited Bill.L (at my expense mind you) to come to a workshop / visit me so that he can get an understanding of the structure. He and Ajax for that matter never take me up on my generous offer.

Over the years I grew very tired of doing and re-doing the figures with endless examples . . . eventually writing half a book on LOE.

The real point is that anyone who implemented a LOE strategy would by now have produced sufficient buffers to overcome probably even the worst market correction. Furthermore, if you understand the structure a market correction is not something a successful investor fears. Corrections present the best opportunity to create more wealth. (Hence me hoping the market declines further today!)

I only decided to answer a few threads because of the "silence is deafening" post . . . out of respect for you.

I am always happy to contribute, but like many other prolific contributers to Somersoft I now choose to offer whatever knowledge I might have to these who actually wish to learn.

Regards,

Steve

PS1: I will be sure to expand further on the actual figures and result achieved on InvestEd.

PS2: Thanks WillG . . . your sentiments are good and well founded.

 

[Mr. Fabulous]

It's not about who 'wins' there are no 'winners' and 'losers' it's not a competition! What I see happening here (again) is that Bill puts forward his opinion - which is fine - I liked his 'worse case scenario' post - it does put into perspective what can happen.

However, what really rubs me up the wrong way is that when Steve posts a counter example - a 'best case scenario', Bill continues to attack it, even though it's a real life example! It just seems to me that no matter what Steve says or does, Bill will always find a way to attack it.

So in that case, I don't really blame Steve for getting frustrated to the point he doesn't see the value of posting on Somersoft anymore as, to my mind, he's exhausted all avenues in this debate and it's still attacked with vigour.

Mark

 

[Patosan]

I would like to see a moderated thread where Bill and Steve put there points across and where there is a mechanism to vote on the winner. I have learned a lot from Steves ideas and Bill's analytical approach and find merrit in both arguments.

I am not interested in personal attacks or people walking out. This is an internet forum, not a physical boxing match.

Cheers

G'day WillG,

I'm with Mark in not seeing the benefit of a voting battle ... "Steve got more votes so his approach is correct" would have no real meaning.

Agree whole heartedly that this forum is great since both sides' appraches can be put forward ... if at times a tad too forcefully. In fact the to and froing can indeed raise previously unseen issues.
I too see it equally unproductive to attack people or walk out.

Fortunately Steve has been doing a little posting recently ... let's hope this continues.
I hope everyone continues to be involved at whatever level ... we'll all be richer for it.

 

[see_change]

I would like to see a moderated thread where Bill and Steve put there points across and where there is a mechanism to vote on the winner. I have learned a lot from Steves ideas and Bill's analytical approach and find merrit in both arguments.

So why do we need a winner ......

See Change

 

[kph]

Well its got me fascinated and curious to the point of getting organised to attend a workshop.
I really enjoy reading counter viewpoints and opinions from both sides, hence Bill's words are invaluable as are Steve's.

I guess Steve is passionate about his work and hence his ocassional frustration and sensitivity to negative feedback.

For me its a matter of taking it all in, and then filtering out what you don't need/can't use and then getting on with it.

kp

 

[Bill.L]

Hi all,

Lets put some things into perspective.

Alan raised the mythical Sydney couple who would like to LOE now.

"Let's use an example a Sydney couple aged about 50 who've showed some foresight by paying off their Sydney home(now valued at $920K) a few years ago and they've also accumulated three other IP's valued at $450K each....... For simplicity, let's also assume no pensions or Super as this will really vary......let's simply assume 'Living on Equity' (whatever that means?

As the wife's health is now not that good, and they'd like to spend more time with the grandkids, they'd LOVE to retire now on an average of $120K indexed for life but that doesn't look possible. The house they live in is also more than a house.......it's 'home' and they don't want to sell it."

So we were looking into the future.

He then showed how it could be done.....
"They sit down, have a coffee and look at each other glumly... It would have obviously been nice to a) keep their home, b) keep their IP's c) have $120K pa income d) retire early and e) spend more time with the grandkids but this doesn't really look possible.......

Or is it?

Let's say they draw down 80% of their equity.......

$736K from home valued at $920K
$1.08mil from IP's valued at $1.35mil
Total of $2.27 mil available.

They get a Margin Loan at 50% giving them $4.54mil in Managed Income Fund.
Fund Returns on average 10% or $454,000pa.

Interest on Loans:
6.7%(LOC's) of $2.27mil = $152,090
8.0% (Margin Loan Rate) of $2.27mil = $181,600
Total Interest Bill = $333,690pa

Income($454K) - Interest$333.69K) = $120.3K pa.

This is $64.8k pa better than the 'Rent Only' solution and $9k pa better than the sell and invest directly in a Fund solution BUT most importantly, they haven't sold any assets!

Ok......pick it to pieces.......I've simply splashed down some 'unchecked' figures quicky before going to work.........hope it adds to the debate though......


Oops....I just noticed....it was $100K pa we were after.....not $120K wasn't it? Ok......reduce required assets accordingly......"

I noticed in there a line that went "Ok......pick it to pieces"

When someone takes the time to do exactly as Alan asked, I get the comeback lines like

"....Bill.........you have all the religeous zeal of the righteous right don't you? Yet I don't think you even see it?"

My point is what if the future is not like the immediate past????

Show us how resilient the system is compared to just living off the rent, when there is a decline in markets if it happens as soon as the couple put their money in.
I don't know what is going to happen in the future any more than the next person. I just look at the probabilities.

If the next 3 years produces the SAME growth in share prices and house prices that the last few have, then my opinion is we will be in a dangerous asset bubble.

Anyone care to refute that last opinion ????

Remember the couple were looking to start now, they have not built up the "buffer".

Steve, or anyone else with this knowledge,
Now at the risk of being banned, for asking a question (what see-ch was referring to previously, but I promise to be nicer this time), I will ask again.

Is it possible that during a market correction of over 25%, your fund could be showing a greater decline than the overall indices (like the All Ords)????

If what usually happens to inflows and redemptions in funds (ie maximum inflows usually happen around market peaks, while maximum redemptions happen near market bottoms), happens to your fund, how will this affect the performance of the fund near the point of the maximum correction???

bye

 

[WillG]

So why do we need a winner ......

See Change

There's always gotta be a winner !