Hmmm.......I actually don't think Bill is being conservative
enough here......also I think the equity required would be
more and the interest rate
higher for the Les situation.......
BUT
I still think it could work!
We can all sit around and pick out the deficiencies of a number of quite workable investment structures, but let's not forget what
many other people are doing out there.
They're sitting on perfectly good assets and wondering if their pensions, perhaps a bit of Super......... and for the really clever ones, a bit of rent will give them much more than the pension to live on in their retirement years.
Anyone here know of people living in their own home who maybe have another property and are living a very ordinary retirement on the pension? I certainly know a few.......
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.
They've looked at living on the IP Rentals:
Assumptions:
- Each valued at $450K and no debt on them.
- 5% Rental Yield achieved or rent of about $22.5K per year each.
- Costs of about $4K per year for Management, Rates, Insurances, Repairs etc.
Therefore income per IP each year would be about $18.5K ($22.5K - $4K) or about $55.5K per year combined.
Not bad..... but it doesn't give them anywhere near that $120K they wanted.
Next they looked at selling the IP's and living off the invested money.
They sell each property at $450K each or $1.35mil in total and pay say $80K each for Capital Gains, Agents Fees etc. They now have $1.11mil to invest......
They firstly look at putting it all into a nice safe Term Deposit paying around 5% pa.
5% of $1.11 will give them $55.5K pa. BUT they're are getting NO Capital Growth on their 'Assets' anymore. Damn it! Still no $120K pa.
They then look at a higher risk profile situation and possibly put the $1.11mil in a Managed Income Fund that averages 10%pa.
10% of $1.11mil will give them $111K pa.
but being an Income Fund the Growth isn't likely to be anywher near the growth from their previously held Assets. Things certainly look better under this scenario but will probably get progressively worse over time due to the inhibited Capital Growth and inflation.
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......